Banking relationships traditionally begin with deposit accounts, but changes in retail banking, combined with a sputtering economy and the explosion of new technologies, have spawned a new breed of customers who are focused on transactions first.
These transaction-oriented customers tend to be young under 35 and seek incremental financial value from everyday purchases and interactions versus traditional banking relationships. This group has never experienced high or even normal interest rates, so deposit accounts mean little to them. They've grown up with cards and EFTs, not checks. And the Great Recession limited their demand for mortgages, car loans and other traditional loan products. Even when economic prospects improve and interest rates rise, their entrenched transactional habits may prevent banks from establishing traditional relationships with them.
Enabling technology combined with this new mindset has resulted in an environment where financial services are no longer viewed as something primarily provided by banks, but are just another product to be consumed, oftentimes as part of another service. And for transaction-driven customers, a bank is less likely to be the provider than a retailer, restaurant, or other service company. Banks need to recognize that they are competing against other service providers and reorient themselves to acquire transactions first and deposits second.
We see the transaction-based trend among this core group and other consumers, as progressive service companies offer products that outperform deposit accounts. For example, frequent Starbucks' prepaid card users can see a return of well over 10% through rewards, refills, and other offers. Starbucks' mobile wallet drives even higher engagement through additional offers; the wallet has 10 million active users and 5 million weekly transactions. Chick fil-A just launched a similar product.
Consumers also see value in products like Target's decoupled Red card, which offers 5% back on all purchases. While funds come from a checking account, Target controls the customer. Target reports that the Red card accounts for 20% of all Target sales and is growing.
There are other indicators that deposit accounts are losing sway and several emerging services driving the trend:
- Prepaid cards, once geared toward the underbanked, are replacing demand deposit accounts for many consumers. The Federal Reserve's 2013 payment study showed prepaid card transactions growing at 36.1% compound annual growth rate versus 9.3% and 9% for credit and debit cards, respectively. Relatively new services including direct-deposit and mobile-deposit card loading will further accelerate prepaid card use.
- Cash is one of the stickier elements of traditional banking relationships, but emerging person-to-person payment schemes are chipping away at cash and could put significant downward pressure on cash use sooner than some expect. Additionally, crypto-currencies are not going away, and will further erode cash use over time.
- Mobile apps from Mint, Credit Karma, and Check are giving consumers nonbank options for managing money or paying bills. Meanwhile, microlenders like Kabbage are winning over consumers by making loans banks aren't willing to make. Such alternative services will further erode the traditional retail banking relationship.
While they behave somewhat like the underbanked, transaction-based customers are far from it. The underbanked are typically wary of banks or unable to engage them in traditional fashion. Transaction-based customers are merely looking for something else.
So how should banks engage with transaction-based customers?
They should focus on maximizing the volume of interactions; not just financial transactions but all interactions including information and advice. Union Bank of California's new Yuby app designed to teach children financial literacy, exemplifies this approach. Create value in unique ways that increase customer touches and deepen connections.
Loyalty programs must offer flexible conversions at low accrual levels; transaction-based customers are not interested in accruing a million points toward a flat-screen TV. For example, Citibank now allows customers to apply points against bill payments, making it easy for anyone to use points, even in small increments. In addition to credit card usage, points are earned monthly for various product usage such as making bill payments, being enrolled in direct deposit, or having balances on loans or credit lines.
Banks must also create selectable upgrades to basic transactions and charge for them. For example, unlike other mobile deposit solutions, technology vendor Ingo Money marries its mobile capture app with a risk engine to offer immediate, nonprovisional "Good Funds" on captured checks. Users commonly pay 1% to 4% of the check's value for instant access to their money, and the company claims 80% of users pay for the service. Don't underestimate transaction-based customers' willingness to pay for white-glove treatment.
Regions Bank is an example of an institution that is winning the mind-share battle with transaction-based customers. Their well-rounded, mobile-centric consumer experience exchanges value across a myriad of transactions: Popmoney, mobile deposit (incorporating the Ingo Money service), and other services with premium pricing, mixed with a rewards program that earns points based on transactions. Regions is actively driving transactions resulting in growing recurring fee revenue and deeper customer relationships.
The bad news is deposit accounts will not engender strong bonds with transaction-based customers. The good news is these consumers are fiercely loyal to brands that provide exceptional transactional experiences and associated value-adds. They are also willing to pay a premium for them. Banks that focus on creating and delivering unique transactional experiences may find a highly profitable revenue stream as well as a new and profitable class of customers.
Glen Fossella is a technology industry executive with a background in payments and branch automation.